HK, China shares hit fresh 2011 highs, more gains seen

Fri Apr 8, 2011 9:30am GMT

* Rotational buying in telecoms, China Unicom outperforms
* Hang Seng seen testing Nov '10 peaks by early May
* Shanghai hits second consecutive 2011 high
By Yixin Chen and Clement Tan

SHANGHAI/HONG KONG, April 8 (Reuters) - Hong Kong and mainland stocks rose again on Friday, reaching fresh 2011 highs, and institutional investors are expected to keep increasing their exposure next week based on attractive valuations and demand for materials.

The benchmark Hang Seng Index recorded a third weekly gain as institutional investors have turned bullish following a favorable earnings season and signs of China inflation easing.

The Shanghai Composite Index closed up 0.7 percent on the day and 2.1 percent on the week to 3,030.0, a fresh 2011 high, keeping the index above the key 3,000-point level and extending the gain on the year to 7.8 percent.

The benchmark Hang Seng Index closed up 0.5 percent on the day and 2.8 percent on the week. During Friday's trading, it reached a new high for the year of 24,468.6 before dipping to close at 24,396.1.

The next target for the Hang Seng is 25,000 -- which was tested in November 2010.

"The Hang Seng will probably top last November's peak sometime end April or early May," said Li Kwok-Suen, a fund manager with Phillip Securities Ltd in Hong Kong. "Institutional investors will mainly drive this rally, with hedge funds giving it a lift."

In Hong Kong, China Unicom (Hong Kong) Ltd led gains on the benchmark, closing up 6.5 percent on volumes that were five times its Thursday level and 2.3 times its 30-day average. The stock ended the day technically overbought, with a relative strength index (RSI) value of 77.5.

Analysts said there was some rotational buying within the telecommunications sector on Friday, with investors buying Unicom and selling its more established peer, China Mobile Ltd , down 0.3 percent on the day.

Still, several analysts expect China Mobile and HSBC Holdings , which have strong weight in the benchmark, to lead a broad rally on the Hang Seng next week, but suggest that other big banks and resource stocks might support.

HSBC, up 1.0 percent on the day, is trading in Hong Kong at a 12-month forward price-to-earnings ratio of 10.7 times, below the 10-year average valuation of 13.1 times, Thomson Reuters I/B/E/S data showed. China Mobile is trading at 10.1 times, lower than its average valuation over the past decade of 12.6 times.

A slew of IPOs in the next few weeks will likely support a rally, thanks to foreign inflows, which have increased in the last three weeks, analysts said.

SBI Holdings is expected to debut on April 14 with Hui Xian, Cheung Kong's yuan-denominated real estate investment trust, expected to debut April 15.[ID:nTOE72600K]

In its quarterly report released on Thursday, HSBC Global Research shifted to overweight on Chinese equity markets for the first time in a year, while remaining neutral on Hong Kong.

Analysts at the bank cited the effectiveness of Chinese monetary policy on keeping inflation contained. M2 growth slowed to 15.7 percent year-on-year in February, lower than the 16 percent target the Chinese central bank has set for this year. The base effect also suggests inflation will slow in the second half of 2011, HSBC said.

SHANGHAI INVESTORS BUY STEEL

China's main stock index ended up 0.7 percent on Friday as investors bought selected stocks, such as steel companies, keeping the index hovering above the key 3,000-point level.

"Generally, the index did not fall sharply after interest rate hike," said Ju Zihua, an chief analyst AVIC Securities in Jiangxi province. "But, a cautious mood is still hovering around the market, and we still need to focus on some previous hot shares and blue chips."

He said non-ferrous metal, coal, brokerage and other blue chips were in focus.

Turnover in Shanghai fell to 147 million yuan ($22.4 million) from 152 billion yuan on Thursday, reflecting investors' worries about inflation and further tightening of monetary policy.

Almost all steel makers listed on the Shanghai and Shenzhen market rose as investors were upbeat that steel demand would be large in April following the earthquake in Japan.

Inner Mongolia Baotou Steel Union , the most active share, jumped its 10 percent daily limit, while Xining Special Steel Co rose 6.1 percent.
(Editing by Kevin Plumberg and Richard Borsuk, sourced Thomson Reuters)

Japan manufacturers tumble on quake uncertainty

Mon, Mar14, 2011 10:30:00

Shares in Japanese manufacturing companies tumbled following Friday's devastating earthquake, as companies struggled to gather information and investors worried the after-effects of the disaster would hobble production.

The tremor and tsunami killed thousands and knocked out transport and communication links in parts of northern Japan, where many are still without water and electricity.

Auto and electronics makers were among the worst hit when trading resumed on Monday. Concerns about rolling power blackouts that will affect Tokyo and surrounding areas over the next few weeks added to the existing challenge of inspecting and repairing north Japan plants amid further aftershocks.

"It will take quite some time until investors' confidence in Japanese manufacturers returns. When we look back at the Kobe earthquake, it took about a week to get an overall picture of the magnitude of the damage," said Toshihiko Matsuno, senior strategist at SMBC Friend Securities, referring to the 1995 earthquake that killed more than 6,400 people.

"At this point, it's absolutely unclear how the power cut will affect manufacturers' production and businesses."

Analysts said investors were likely to be risk-averse, especially given fears over a possible uncontrolled radiation leak at a nuclear plant north of Tokyo, which was rocked by a second explosion on Monday.

Shares in Sony Corp ended 7.7 percent down in the morning session after the company suspended production at eight plants in the affected region.

Nissan's shares dropped 8.5 percent, with the automaker shuttering all four of its auto assembly plants in Japan. Toshiba Corp, a conglomerate whose products include semiconductors and nuclear reactors, dived 16.3 percent. Hitachi also fell more than 15 percent.

Shares in Tokyo Electric Power Company (TEPCO) were untraded amid a glut of sell orders.

"The potential impact from the situation at TEPCO's nuclear power plant is the biggest difference between this earthquake and the Great Hanshin earthquake," said equities strategist Kiichi Murashima at Citigroup, referring to the Kobe disaster.

"There is a chance that a meltdown will occur at the plant in Fukushima. A reduction in power supply would of course severely impact Japan's economic activity," he added.

The nuclear industry would also likely see an effect on long-term sales, he said.

Many firms are still trying to compile information about the condition of their plants and how the power cuts might affect them.

Amid the destruction, there were some winners among Japanese stocks. Construction shares surged on expectations of booming orders to rebuild northeastern Japan, pushing the construction sector index up 8.5 percent to an 18-month high.

Shares in general contractor Kajima Corp jumped 31 percent, while rival Hazama Corp rose 41 percent and home builder Misawa Homes was inundated by a glut of buy orders.

(Reporting by Mariko Katsumura, Mayumi Negishi and Isabel Reynolds; Editing by Edwina Gibbs and Joseph Radford, sourced:Reuters)

Precious-Gold dips after Libya peace plan, record in sight

Thu Mar 3, 2011 9:40am GMT

* Libya mulls Venezuelan peace proposal
* Gold rally pauses within sight of record highs
* Coming up: ECB rate decision; 1245 GMT
(Updates comment, details, prices; prvs SINGAPORE)
By Amanda Cooper

LONDON, March 3 (Reuters) - Gold eased on Thursday after the Arab League said aVenezuelan proposal to end the Libyan conflict was under consideration, but entrenched uncertainty over the future of the region kept prices within sight of record highs.

Arab League Secretary General Amr Moussa told Reuters on Thursday that the a plan to bring peace to proposed by Venezuelan leader Hugo Chavez was "under consideration."

While this has eroded some of the safe-haven demand that has shot gold and the Swiss franc to all-time highs this week, financial markets are on edge, as reflected by volatility indices such as the VIX hovering near 3-1/2 month highs.

Spot gold XAU=, which has risen by 10 percent in the six weeks since the unrest in Tunisia and Egypt spilled into Libya, Yemen, Bahrain and, most recently, Oman and Iran, hit a record
$1,440.10 an ounce on Wdnesday.

The gold price was last down 0.2 percent at $1,432.30 an ounce at 0928 GMT, while U.S. April gold futures GCv1 were down 0.4 percent at $1,431.40. Analysts said after having rallied in four of the past five sessions, a modest decline did not signify the recent rally was over.

"That's to be expected anyway, with gold having done quite a lot over the last couple of weeks and set a new high. I don't think it should be a surprise to see some consolidation at the very least," said Credit Suisse analyst Tom Kendall.

"The Middle East has certainly been a big factor for gold over the last few weeks," Kendall said. "If the situation deteriorates, say in some of Libya's neighbours or if we saw more widespread protests in places like Bahrain or Saudi Arabia, then for sure you'd see another reaction in the energy markets and in gold."

PEACE IN LIBYA?

News network Al Jazeera said earlier the plan involved a commission from Latin America, Europe and the Middle East trying to reach a negotiated outcome between Libyan leader Muammar Gaddafi and rebel forces for this North African oil-producing country.

"If some sort of resolution is achieved for Libya, it will certainly affect gold -- investors will take profit and adjust their long positions," said Ong Yi Ling, an analyst at Phillip Futures.

Brent crude LCOc1 dropped more than $3 on the news to an intra-day low of $113.09 a barrel, before recovering to near $115 by 0700 GMT, while European equities pared some of the
previous day's declines and the euro EUR= hovered near
four-month highs ahead of a European Central Bank rate meeting.

Investors are braced for what could be one of the most important ECB meetings this year, in which the bank is expected to step up its anti-inflation rhetoric and may phase out some of
its crisis support measures.

Most economists do not expect rate hikes to materialise until at least October.

But at the very least there is a high chance the ECB will restrict the amount of funds available at its three-month liquidity tenders as it withdraws the emergency lifelines put in place during the depths of the financial crisis.

Rising interest rates can undercut gold's appeal among investors as it bears no yield of its own. But the subsequent boost such an indication from the ECB could give the euro against the dollar could prove supportive.

"Clearly there is a growing appreciation that the ECB is likely to move faster than expected on rates and, at the same time, the Fed is still very much on hold," said Credit Suisse's Kendall. "So from a rates and a foreign-exchange perspective over the medium term, certainly you would think this would be positive for gold."

China, which has raised interest rates twice in the past six months and increased bank reserve requirement ratios eight times since the start of 2010, will probably raise them again this
month, as the world's second-largest economy battles stubborn inflation.

Silver XAG= was largely unchanged on the day at $34.72, just shy of Wednesday's 31-year high at $34.96 an ounce. Platinum XPT= eased 0.3 percent to $1,840.24 an ounce, while palladium XPD= was up 0.1 percent at $817.28. (Additional reporting by Rujun Shen in Singapore; Editing by William Hardy, Thomson Reuters)

BHP Billiton in big US shale gas deal

By Rachel Hewitt,
Feb23, 2011 12:00AM

MINING powerhouse BHP Billiton has snapped its streak of failed deals with a $US4.7 billion foray into United States shale gas.

In a move analysts said would cool speculation BHP has a bigger oil play in the pipeline, the miner yesterday revealed it had bought into an Arkansas shale gas field, allowing it access to "the fastest growing market in the world".

As BHP unveiled the deal, it also pleased investors by announcing that a $5 billion off-market buyback of its Australian shares would begin immediately.

The news sent BHP shares almost 1.6 per cent, or 73, higher to $46.58 -- making it a standout in a downbeat market.

BHP's buy of all Chesapeake Energy Corporation's interests in the Fayetteville shale field is its first key deal since its failed $40 billion tilt for Canada's PotashCorp in November.

Citi analysts yesterday said the shale gas play would "partially cool the heated speculation of a larger on-market M&A (mergers and acquisitions) oil deal being in the pipeline".

Deutsche Bank analyst Paul Young said the Fayetteville buy fitted BHP's checklist of "low-cost, long life and expandable" assets.

"We did think, and we continue to think, that they're also looking at acquisitions in deep water oil such as the Gulf of Mexico," he said.

Energy rival Woodside Petroleum has long been named as a potential BHP takeover target, but Pengana Capital fund manager Tim Schroeders said yesterday that appeared increasingly unlikely.

Platypus Asset Management's Prasad Patkar described BHP's shale gas foray as "a bet on the long-term price in the US domestic gas market".

Through the deal, BHP will own and operate the second biggest position in the Fayetteville field.

BHP Petroleum chief Michael Yeager said it would increase the company's reserve and resources base by 45 per cent and BHP would acquire more than 10 trillion cubic feet of gas.

He said BHP hoped to triple the asset's daily volumes over the life of the development.
(sourced:Herald Sun)

TATA Steel to raise INR 3000 crore via NCD

Friday, 18 Feb 2011

TATA Steel, after its INR 3,477 crore follow on public offer, has secured commitments from investors to raise another INR 3,000 crore through a private placement of non convertible debentures in two tranches.

A part of this secured commitment had been raised in January for the Jamshedpur project and will continue as and when the need arises.

Mr Koushik Chatterjee Group CFO of TATA Steel told Business Standard that “The interest rate for this INR 3,000 crore NCD will be a ballpark of 9 to 9.75% and it will mature after 20 years.”

He said that “The idea is to move from high cost debt to a low cost one and with a better tenure. The company is now focusing on loan products that would give it a flexibility to repay over a long period of time, preferably 20 years, like in the case of this recent NCD.”

On a further fund raising of USD 500 million through a perpetual bond issue, which ideally is a very long term bond with interest payments that go on forever. Mr Chatterjee said that “Nothing is on the table right now.”

However, sources said that the company is looking to raise this sum through a long term bond placement.

Mr Koushik Chatterjee said that the company may launch the issue in the next three to six months.

Sources said the company was looking to raise the money from international market and will bear an interest rate of around 9%.

Mr Chatterjee made it clear that the INR 3,000 crore NCD will be used entirely for the capital expenditure of Jamshedpur and Orissa. He added that “Immediate focus is Jamshedpur expansion and commissioning and post that, the funding of the Orissa plant.”

(Sourced from BS)

Tags:Tags:TATA Steel, NCD, investors, non convertible debentures,Jamshedpur project,Orissa steel plant, Tata Steel expansion

BHP Billiton investors pin hopes on expanded share buyback

* Consensus points to H1 attributable profit of $10.3 bln
* BHP can return $10 bln-$25 bln via shr buyback/special div-analysts
* BHP may be interested in an oil and gas company
* Shares up 9 percent in 2 weeks
By Sonali Paul
MELBOURNE, Feb 16 (Reuters) - Top global miner BHP Billiton is expected to nearly double its first-half profit to a record, with investors focused on its strategy for its bulging cash pile as iron ore, copper and oil prices soar. Shareholders have been clamouring for the company to expand
its ongoing $4.2 billion share buyback, with only a quarter of that completed so far, after it faltered on three major deals over the past three years. BHP remains undaunted in its takeover ambitions, despite having been forced to ditch its $39 billion bid for top global fertiliser maker Potash Corp, an iron ore joint venture with Rio Tinto and a full takeover of Rio Tinto in the face of government and regulatory resistance. So BHP may look to preserve cash as it looks to pounce on an oil and gas target, with speculation that it would be interested in Anadarko Petroleum , Apache Petroleum or Woodside Petroleum Even with acquisitions and plans to spend $15 billion a year on projects, BHP has the capacity to return anywhere between $10 billion and $25 billion to shareholders through share buybacks or special dividends, analysts estimate. On Tuesday, speculation centred around $10 billion. "They've got the capacity. It's whether that's what they want to do," said James Bruce, portfolio manager at Perpetual Investments, one of BHP's top ten Australian shareholders. BHP is expected to report attributable profit before one-offs of $10.3 billion for July-December, based on an average of 14 analysts' forecasts, up from $5.7 billion a year ago. That would follow Rio Tinto's bumper second-half profit of $8.22 billion last week and a promise to return $5 billion to shareholders over the next two years, starting off with an on-market buyback of its UK listed shares.

For StarMine comparative data: link.reuters.com/tep97r BHP's shares are considered cheap at the moment, trading on a forward earnings multiple of just 11.9 even after a 9 percent share price rally to a near 33-month high ahead of the results. "We think that BHP is attractively priced for investors," Bruce said. BHP shares closed up 0.2 percent at A$47.36 ahead of the
results announcement, due before the Australian market opens on Wednesday. Australian fund managers looking for an off-market buyback of BHP's Australian shares are the least likely to get their way, as it makes more sense for BHP to buy back its UK listed shares, which are cheaper, on market. Analysts expect a dividend of around 49 cents a share, up from 42 cents a year ago. Smaller rival Xstrata set the pace last week topping forecasts with an 86 percent jump in full-year profit and a dividend that was nearly double market expectations.
(Editing by Anshuman Daga, source:ThomsonReuters)
Tags: BHP Billiton, investors, share buyback, H1 attributable profit, Market analyst, shares, Rio Tinto, take over, Xstrata,

Indonesian coal miner Riau Bara Harum eyes $500 mln IPO

Feb 11, 2011

Indonesian coal miner Riau Bara Harum aims to raise up to $500 million from an initial public offering (IPO) in the second half of the year, to tap investor demand in the world's biggest thermal coal exporting nation, sources with direct knowledge of the deal told Reuters on Feb 10.

The IPO would offer investors another opportunity to tap into high calorie coal assets, and could be the biggest thermal coal listing in the country for three years since PT Bayan Resources raised $529 million in 2008.

Riau Bara Harum, which has an estimated 200 to 300 million tonnes of reserves with a calorific value of between 6,100 to 6,200 kcal/kg, owns more than 24,000 hectares of mining areas in Riau on Sumatra island, said one of the three sources.

The firm aims to raise up to $500 million in order to expand its business as it has very little production at the moment, said another of the sources briefed on the IPO, adding that the firm expects to sell a 20 to 25 percent stake.

More private and state-owned firms are coming to the market this year to tap investor demand for Indonesian assets, though worries over inflation have driven the stock market down 9 percent this year after a 46 percent rally in 2010. (sourced:reuters)

South Africa Wants State to Play Role in Coal Mining

February 02, 2011, 7:40 AM EST
By Mike Cohen

Bloomberg-South Africa’s government wants a state-owned mining company to have coal interests to help ensure power utility Eskom Holdings Ltd. can secure supplies of the fuel, Mineral Resources Minister Susan Shabangu said.
“Coal is a strategic asset,” Shabangu told the McCloskey South African Coal Exports Conference in Cape Town today. “We need to grow our economy, we need energy in general. It becomes important for the state to play a role there. We are looking at 18 months” to clarify the role the mining company would play.

Eskom, which generates 95 percent of power in Africa’s largest economy, has called on the government to develop a coal export policy that will guarantee it sufficient, affordable supplies as exports become more lucrative for producers. BHP Billiton Ltd., Xstrata Plc and Anglo American Plc are among the biggest coal producers in South Africa, which generates about 93 percent of its electricity from the fuel.
“It is not the government’s intention to enter the minefield of specifying all the processes and it is our fervent hope that the industry will recognize the particular challenge and work with us,” Shabangu said. “We reserve the right to take corrective measures should the situation demand it. A balance has to be found between pursuing the principles of free market while taking into account the needs of the country.”
Eskom burned 123 million metric tons of coal in its last fiscal year. Recent floods in Australia have bolstered demand for South African coal, and pushed up international coal prices.

‘Australian Misfortunes’
“Some will see an opportunity of making more money on the back of the Australian misfortunes,” Shabangu said. “That opportunity may very well be a serious threat to our supplies for electricity generation. We will be monitoring the situation closely because we will not allow a situation” that will harm the economy.
Shabangu welcomed a Jan. 31 call by BHP Billiton’s South African energy coal unit for bids to buy prospecting rights over its undeveloped reserves, saying it would help bring new investors into the industry.
South Africa is the world’s seventh biggest coal producer and the fifth biggest exporter of the fuel, government data shows. In 2009, the country produced 249 million tons of thermal coal, 74 percent of which was consumed locally, and had about 30 billion tons of reserves.
--Editors: John Deane, Alastair Reed

Vale, ArcelorMittal among 15 bidding for Mongolia coal mine

By Miyoung Kim and Yuko Inoue
SEOUL/TOKYO Mon Jan 31, 2011 (Reuters)

Resource-hungry Asian states are locking horns with steelmaker ArcelorMittal and miner Vale to develop the world's largest untapped coking coal deposit in Mongolia, scrambling for raw materials to produce steel.
China, Japan and South Korea are scouring the world from Africa, India, Australia and South America and snapping up iron ore and coking coal assets to diversify from heavyweight suppliers such as BHP Billiton and Rio Tinto.

Asian private and state-linked firms are among the 15 bidders vying for Tavan Tolgoi coking coal project, along with the world's top steelmaker ArcelorMittal SA and the top iron ore miner Vale of Brazil, according to a source with direct knowledge of the matter.
Mongolia, while poor and undeveloped, sits on vast quantities of untapped mineral wealth and analysts say it could be one of the fastest growing economies of the next decade.
The country's fledgling democratic government plans to keep ownership of the mine, estimated to house a total 5 billion tonnes of coal reserves, and give strategic investors a chance to develop its western block on a contract basis.

Over 20 investment banks will this month submit written proposals for the privatisation of Tavan Tolgoi, which could value it at up to $8 billion, The Independent on Sunday reported this week.
"It is the biggest undeveloped coking coal mine in the world, it is strategically important and that's why you see so many interested parties," said Carol Cao, an analyst with Macquarie in Hong Kong.
South Korea bidders in the race also included Xstrata, U.S. coal miner Peabody and consortia led by South Korea, China, Japan and India.
State-run Korea Resources Corp said its consortium is formed of nine Korean firms, two Russian firms and four Japanese companies to develop the Tsankhi block, which is estimated to have 1.2 billion tonnes of coal reserves.
"Mongolia has rich untapped reserves and the block in the auction is very attractive, as it is one of the few large-sized coal mines in the world left undeveloped," Korea Resources Corp said in a statement.

UNCERTAINTY
Steelmakers across Asia have been scrambling to secure new supply channels after devastating floods hit Queensland -- the heart of Australia's coal mining sector -- in December and January.
The Mongolian government is likely to decide preferred bidders in mid-February, after the Lunar New Year holiday starting this week, Korea Resources said.
But auction, which closed on Monday after two weeks of delay, faces uncertainty, as Mongolia has struggled to develop a consistent strategy when it comes to overseas companies buying into national assets.

It has long frustrated the global resources industry for dragging its feet on investment decisions. The government, hobbled by indecision and bureaucratic infighting, took years to conclude the agreement to develop the Oyu Tolgoi copper and gold project.
An initial 2009 bidding auction for the Tavan Tolgoi coal project attracted consortia from South Korea, Japan and Russia as well as mining giants such as BHP, Vale, India's Jindal, and China Shenhua Energy.
But the government abruptly announced the auction would be cancelled early last year and said the state would maintain control and foreign firms could bid for licenses to develop and run the mine.
A top executive at a Japanese trading firm said BHP, which previously expressed interest in the project, had pulled out.

BIDDERS
Members of South Korean bidding group include steelmaker POSCO, utility firm KEPCO, trading firms LG Corp and Daewoo International Corp, Russian Railways and Japanese trading houses Itochu Corp, Sumitomo Corp, Marubeni Corp and Sojitz Corp.
Sources told Reuters on Monday competing Mitsui is leading a Japanese consortium, which has partnered with China's state-run Shenhua Group.
Some investors said winning the deal could add lustre to the winner's stock price over the long-term. (Reporting by Rebekah Kebede in PERTH, Ju-min Park in SEOUL, sourced: reuters)

Best Bets in the Coal Sector

Investorsoapbox PM FRIDAY, JANUARY 14, 2011
FBR Capital Market

We are dialing beta modestly in the coal group despite increasing our metallurgical-coal price (5%-11%), estimates (10%) and price targets (6%), essentially taking a breather after the phenomenal run in the space over the past six- and one-month periods.

As a result, we are downgrading Patriot Coal (ticker: PCX) and Walters Energy (WLT) to Market Perform from Outperform and would advise investors to move toward the lower-beta names in the space in the meantime ( Peabody Energy (BTU), Consol Energy (CNX), Arch Coal (ACI), Alpha Natural Resources (ANR), Cliffs Natural Resources (CLF), and Cloud Peak Energy (CLD)).
The risk to our downgrade is that rains [floods in Australia] reemerge and take additional met coal off the market (now forecasted at 13 million metric tons (tonnes), from eight million tonnes), but the rails and ports are starting to come back while the rains take a break. We are leaning more toward steam, as steam-coal prices are rising and supply/demand tightness is deeper and should last for at least another year. We are trimming our fourth-quarter 2010 estimates, too, but believe most investors are more focused on the rains' impact than the short-term and the traditional volatile earnings season. Presently, the coal group trades at 2011-2013 enterprise value/earnings before interest, taxes, depreciation and amortization (EV/Ebitda) estimates of 7.5 times, 6.3 times and 5.5 times, respectively (a one times expansion despite higher-forecasted met-coal prices) and has about 10% upside after the recent performance.

Since July 6, 2010, Walters had a phenomenal run (true alpha generation), appreciating 124% (26% for S&P 500 and 89% for group). While we continue to like Walter Energy and Western Coal's combined asset base and believe that there is a scarcity value associated with such a premium, high-quality, met-coal pure-play, we believe that it is now fairly valued, given our commodity-price outlook. Furthermore, heightened met-coal euphoria may create unnecessary risk for the stock. However, we will review our ratings as time progresses and a better assessment of met-coal pricing surfaces.

Similarly, Patriot Coal had a phenomenal run over the past month, with the stock appreciating 62.5% (3% for S&P 500 and 21% for group) since our Dec. 20, 2010, upgrade, primarily driven by potential met-coal supply disruption in Australia due to rains. While we agree with the earnings leverage from met-coal pricing (which is getting reflected), we believe that investors also face normal-CAPP risks (rail, geology, natural gas).

We are raising our 2011-2013 met-coal prices to $250 per tonne, $225 per tonne and $220 per tonne, an increase of about 5%-11% from prior estimates. While the risk is still to the upside, we are raising our view of the met-coal price curve and taking a breather for now. As a result, we are raising our earnings-per-share and Ebitda estimates by 14% and 6%, respectively, but trimming the fourth-quarter 2010 by about 10% to account for recent press releases and rail issues. We are raising our met-coal supply disruption out of Australia to 13 million tonnes, from eight million tonnes, with an additional 8.5 million tonnes of steam coal off line.

The Australian rain issue is discounted in the stocks. Met-coal names have rallied on the back of media reports highlighting the impact on coal mines and supply infrastructure. While it could be too soon to gauge the total impact, we estimate that about 13 million tonnes (versus an eight million tonnes estimate on Jan. 3, 2011) of met-coal supply is likely removed from the market. We believe that this situation is now becoming better understood (hyped, in some cases) and discounted in the stocks. While things could get worse, since it is still the rainy/cyclone season, we believe a near-term peak has been reached. Furthermore, we expect coal producers to devise ways (crossover tons, running mines harder, etc.) to make up for lost profit. Furthermore, steelmakers will identify alternate sources of supply, such as U.S. Northern Appalachia (NAPP) coal (which is thermal coal).

Overall, we believe that the coal group is likely to announce fourth-quarter 2010 earnings below consensus (unless expectations are lowered); but investors may shrug this off, given underlying positive trends (supply disruptions, demand recovery, and rising prices). The key themes that could play out/foreshadow this earnings season: 1) rising exports -- steam and met; 2) increasing capital spending; 3) tightening spreads supporting export of crossover product; 4) strategic discussion, including mergers and acqusitions; and 5) production issues/constraints.
We note that some companies (Arch Coal, Peabody, Massey Energy (MEE) and Consol Energy) have already provided revised guidance/production expectations.
-- David M. Khani

-- Mitesh Thakkar

Commodities are hot again

Courtsey news via MarketWatch by Michael Kahn, Jan. 3, 2011

NEW YORK (MarketWatch) — Deflation may be the talk of the town, but don’t tell that to the commodities markets. Despite pullbacks last month, a smorgasbord of commodities from copper and coffee to oats are at or near 52-week highs.
What’s going on? Many would like to credit a weak U.S. dollar. Since most commodities are priced in dollars, if it goes down in value it takes more of them to buy the same amount of commodities. The price by definition goes up. But the dollar was relatively unchanged last month after rallying off a rather solid support level in November. We have to conclude that there was actual rising demand for commodities, making prices go up no matter what currency is used to buy them. Perhaps it was fears over continued sovereign-debt problems in Europe. Or maybe it was money rotating out of bonds. Whatever reason the pundits would like to cite, the fact, not opinion, is that the original formulation of the Commodities Research Bureau index of 17 commodity futures traded above its 2008 peak level before December ended (see chart).
This index is more diverse in weighting than its replacement, the Reuters Jefferies CRB index, as the latter is more heavily skewed toward energy markets. I liken it to the “new Coke” of indexes as the original worked well for many decades without need for change. Let’s refresh our memories about what was happening in the second quarter of 2008. The most significant, as well as anguish-inspiring, was crude’s peak at $147 per barrel. “Evil speculators” had driven the market to insane heights, and we were paying $4 per gallon at the pump.

Gold had just reached $1,000 per ounce for the first time before backing down. Corn dragged all the grains into the stratosphere thanks to misguided love for ethanol. Even cotton was trading at what was then multiyear highs. It was no wonder the old CRB index, now called the Continuous Commodity index, had shattered its previous all-time high after tripling since 2001. But when the economic crisis of 2008 ballooned, demand for commodities plummeted and so did the CRB index. More than few politicians, I am sure, applauded the speculators’ pain. Over the past two years, however, commodities began a quiet comeback. Precious metals ran back into the record books led by sizzling silver. Grains plodded along until exploding higher in June. Sugar, cotton and even lumber all moved significantly higher, and the old CRB index already is back to its lofty 2008 levels.
To be sure, the ride was bumpy and November took down most commodities quite sharply as the media once again trumpeted the bursting of a bubble. December recoveries left patterns on the charts that were not consistent with burst bubbles. Indeed, the old CRB index merely corrected down to its rising 50-day moving average the way bull markets are inclined to do.
As of this writing in late December, the index was poking its head above resistance from both its November high and 2008 peak. Indeed, chart watchers may have labeled the pattern as a “cup with handle,” a bullish pattern with a colorful name. The theory behind it is that a peak is followed by a pullback, a pause and then a recovery. That forms the cup. A new pause at resistance forms the handle of the cup. The next breakout, if it occurs, would be a fairly reliable buy signal.
For investors, playing commodities is often risky. But there are numerous exchange-traded funds and exchange traded notes available for individual commodities, such as gold, silver, oil, grains and cotton. I would advise reading their prospectuses carefully, however, as many are not as simple as stock-market ETFs with which investors may be familiar.
Michael Kahn writes the Getting Technical column for Barron’s Online , which analyzes sectors and markets twice a week.